Penal damages
Encyclopedia
Penal damages are best seen as quantitatively excessive liquidated damages
and are invalid under the common law
. While liquidated damages are a priori calculations of expectation loss under the contract, penal damages go further and seek to penalise a party in some way for breach
of a clause above and beyond the loss suffered by the innocent party as a result of this breach. Many clauses which are found to be penal are expressed as liquidated damages clauses but are seen by courts as excessive and thus invalid.
The judicial approach to penal damages is conceptually important as it is one of the few examples of judicial paternalism
in contract law. Even if two parties genuinely and without coercion wish to consent to a contract which includes a penal clause, they are unable to. So, for example, a person wishing to give up smoking cannot contract with a third party to be fined $100 each time they smoke as this figure does not represent the expectation loss of the contract.
, which are awarded in certain types of tort
actions for actions which caused harm to the plaintiff. Penal damages are also different from treble damages
, which are generally set by statute
for certain violations of competition law
and related laws.
Liquidated damages
Liquidated damages are damages whose amount the parties designate during the formation of a contract for the injured party to collect as compensation upon a specific breach ....
and are invalid under the common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
. While liquidated damages are a priori calculations of expectation loss under the contract, penal damages go further and seek to penalise a party in some way for breach
Breach of contract
Breach of contract is a legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance....
of a clause above and beyond the loss suffered by the innocent party as a result of this breach. Many clauses which are found to be penal are expressed as liquidated damages clauses but are seen by courts as excessive and thus invalid.
The judicial approach to penal damages is conceptually important as it is one of the few examples of judicial paternalism
Paternalism
Paternalism refers to attitudes or states of affairs that exemplify a traditional relationship between father and child. Two conditions of paternalism are usually identified: interference with liberty and a beneficent intention towards those whose liberty is interfered with...
in contract law. Even if two parties genuinely and without coercion wish to consent to a contract which includes a penal clause, they are unable to. So, for example, a person wishing to give up smoking cannot contract with a third party to be fined $100 each time they smoke as this figure does not represent the expectation loss of the contract.
As distinguished from other types of damages
Penal damages are to be distinguished from punitive damagesPunitive damages
Punitive damages or exemplary damages are damages intended to reform or deter the defendant and others from engaging in conduct similar to that which formed the basis of the lawsuit...
, which are awarded in certain types of tort
Tort
A tort, in common law jurisdictions, is a wrong that involves a breach of a civil duty owed to someone else. It is differentiated from a crime, which involves a breach of a duty owed to society in general...
actions for actions which caused harm to the plaintiff. Penal damages are also different from treble damages
Treble damages
Treble damages, in law, is a term that indicates that a statute permits a court to triple the amount of the actual/compensatory damages to be awarded to a prevailing plaintiff, generally in order to punish the losing party for willful conduct. Treble damages are a multiple of, and not an addition...
, which are generally set by statute
Statute
A statute is a formal written enactment of a legislative authority that governs a state, city, or county. Typically, statutes command or prohibit something, or declare policy. The word is often used to distinguish law made by legislative bodies from case law, decided by courts, and regulations...
for certain violations of competition law
Competition law
Competition law, known in the United States as antitrust law, is law that promotes or maintains market competition by regulating anti-competitive conduct by companies....
and related laws.